CANADA FX DEBT-C$ slides on European fears, BoC decision looms

Reuters Staff

4 Min Read

* C$ falls to 95.42 U.S. cents

* Bonds surge as European risks reawakened

* Next up: Bank of Canada rate decision on Wednesday

By Ka Yan Ng

TORONTO, Sept 7 (Reuters) - The Canadian dollar closed near
its session low against the U.S. currency on Tuesday on fresh
concerns about European banks, with investors also focused on
the Bank of Canada's interest rate decision on Wednesday.

In a holiday-shortened week, Canadian markets were greeted
with new concerns on European banking as the Wall Street
Journal reported "stress tests" published more than a month ago
underestimated some lenders' holdings of potentially risky
government debt.

The renewed concerns fed into aversion for riskier assets,
pulling down stock markets worldwide and the price of oil,
while boosting appetite for government debt. [MKTS/GLOB]

But oil pared losses after a deadly explosion ripped
through a Mexican oil refinery, raising concerns that Mexico, a
top U.S. crude supplier, would have to import more fuel.

"With the global economic backdrop as it is, people are
going to tend towards a risk aversion trade," said John Curran,
senior vice president at CanadianForex, a commercial foreign
exchange dealing firm.

Curran, who is one of the minority of analysts who see no
change in interest rates by the Bank of Canada on Wednesday,
said technical charts for the 100- and 200-day moving averages
signal a bearish trend for the Canadian dollar.

"Even if the Bank of Canada does raise rates tomorrow, I
think the Canadian dollar is going to suffer eventually."

The Bank of Canada decides on interest rates on Wednesday
in one of the closer calls in some time. Markets on Tuesday
were pricing in about a 64 percent probability of a
quarter-point hike, according to a Reuters calculation based on
yields on overnight index swaps. BOCWATCH

A Reuters poll of 41 forecasters, including Canada's 12
primary dealers, showed a majority see a hike. [CA/POLL]

The Canadian dollar finished at C$1.0480 to the U.S.
dollar, or 95.42 U.S. cents, almost matching its session low at
C$1.0483. The finish was down from Friday's Bank of Canada
closing level at C$1.0393 to the U.S. dollar, or 96.22 U.S.
cents. Markets were closed on Monday.

CANADIAN BONDS

Canadian bond prices surged across the curve, tracking U.S.
Treasuries on Tuesday, as worries about the health of European
banks pushed up bids for safer assets. [US/]

The European banking issue was largely pushed to the
sidelines over the summer, but the fears were reawakened by the
newspaper report.

"People are realizing it's not as benign as what they had
hoped," said David Tulk, senior macro strategist at TD
Securities.

Even with the resurgence of European jitters, the Bank of
Canada is still more likely to focus on the U.S. economy in its
statement to accompany its rate announcement on Wednesday.

"The bank did acknowledge in July that the immediate threat
posed by sovereign risk had faded -- and that's generally still
true," said Tulk.

"But generally the fear is that the U.S. has certainly
slowed by more than what the bank had expected," he added,
noting that Canada's proximity to the United States likely
"takes on a greater amount of importance in the bank's eyes."

The two-year Canada bond CA2YT=RR soared 19 Canadian
cents to yield 1.281 percent, while the 10-year bond
CA10YT=RR advanced C$1.10 to yield 2.819 percent. Canadian
bonds outperformed across the curve against U.S. Treasuries,
except in the 30-year maturities.
(Editing by Jeffrey Hodgson)